ppps in water sector final book

8/8/2019 PPPs in Water Sector Final Book

1/146

MANTHAN (MP)

Partnerships or

Privatisation?

In Water Sector:

Public

Private

Partnerships


2/146

PPPs In Water Sector/i

Public-Private Partnerships

in Water Sector:

Partnerships or Privatisation?

January 2010

Gaurav Dwivedi

Manthan Adhyayan kendraBadwani (MP)


3/146

ii /PPPs In Water Sector

Public-Private Partnerships in Water Sector:

Partnerships or Privatisation?

Author - Gaurav DwivediResearch Support: Makarand Purohit

Published By: Manthan Adhyayan Kendra

Dashera Maidan Road,

Badwani (M.P.) 451 551

Ph: 07290 - 222 857

Email: [email protected]

Web: www.manthan-india.org

January 2010

Layout and Design: Rehmat

Cover Design: Makarand Purohit

Printed at:

Suggested Contribution: Rs. 150.00


4/146

PPPs In Water Sector/iii

Contents

List of Abbreviations ................................................................... v

Foreword by David Hall ............................................................. ix

Preface ..................................................................................... xiii

Background .............................................................................. 1

Why PPPs? ............................................................................... 3

PPPs in India............................................................................. 7

PPPs - Estimates and Expectations ........................................ 9

What is a PPP? ....................................................................... 13

Privatisation and PPPs - What is the Difference? ................ 17

Arguments in favor of PPPs .................................................. 21

PPPs are Cheaper ........................................................................ 21Private Corporations are More Efficient ..................................... 24

PPPs bring in Private Investments ............................................... 27

PPPs are In-Budget and On-Time ................................................ 32

Operational Issues with PPPs ............................................... 35

Risk Transfer ................................................................................. 35

Division of Roles .......................................................................... 37

Post-contractual changes ............................................................. 40

Governance Issues - Real Concerns..................................... 45

Transparency and Accountability ................................................. 45

Public Participation and Public Policy ....................................... 47

Access to information ................................................................... 49

Equality and Social Justice .......................................................... 51

Lack of Credible Oversight and Regulatory Mechanisms............ 52

GoI Guidelines for Sector Reform and Successful PPPs ............. 57

Social Obligations and PPPs ................................................. 61

Responsibility of Provision/ Service Delivery .............................. 61

Community Welfare and Equity .................................................... 64

How India fares in terms of its community welfare? .................... 65


5/146

iv /PPPs In Water Sector

Projects and Policies Promoting PPPs in India ................... 67

Government of India - Steps Promoting PPPs ............................. 67

Role of the IFIs in promoting PPPs ............................................ 67

Alternatives to PPP model ..................................................... 71

Some of the Other Models ............................................................ 72

Major Factors in Alternative Models ........................................... 72

Looking Beyond PPPs ........................................................... 83

Endnotes ................................................................................. 85

References .............................................................................. 93

BoxesBox-1: Privatisation is a Two-Horse Cart ..................................... 4

Box-2: The Admittance of a Mistake.............................................. 5

Box-3: MNC Demands ................................................................... 6

Box-4: Some Key Elements of PPPs ............................................ 14

Box-5: Types of Public-Private Partnerships .............................. 15

Box-6: Metro Manila Water Supply Project ................................ 28

Box-7: The Hyderabad Metro Project ......................................... 29

Box-8: Maheshwar Hydro Power Project ................................... 33

Box-9: Reliance Sasan Ultra Mega Power Project ..................... 43

Box-10: Viability Gap Funding ................................................... 68

Box-11: Institutional Support ...................................................... 69

Tables

Table-1: Sectorwise Investment Anticipated ................................ 10

Table-2: Share of Public and Private Sector Investments ............11Table-3: Failures and Reasons - Some Cases ............................. 18

Table-4: Some PPP Projects and Public Resources Involved ..... 31

Table-5:A Generic Table of Risk Sharing ................................... 40

Annexure

Annex-1: List of PPP Projects under execution in India ...........A-1

Annex-2: Reforms Projects Promoting PPPs in India by IFIs ...A-5

Annex-3: Note to MoWR on PPPs in the Water Sector ..............A-9Annex-4: A Note on JNNURM................................................. A-15

Annex-5: A Note on UIDSSMT................................................ A-21

Annex-6: Types of PPPs .......................................................... A-25


6/146

PPPs In Water Sector/v

List of Abbreviations

ADAG - Anil Dhirubhai Ambani Group

ADB -Asian Development Bank

ADF -Airport Development Fees

AusAID -Australian Agency for International Development

BHEL -Bharat Heavy Electricals Limited

BOO - Build Own Operate

BOOT - Build Own Operate Transfer

BOT -Build Operate Transfer

CAG - Comptroller and Auditor General

CAS - Country Assistance Strategy

CEO - Chief Executive Officer

CERC - Central Electricity Regulatory Commission

CUPE - Canadian Union of Public Employees

DMAE - Departamento Municipal do Agua e Esgoto

DEA -Department of Economic Affairs

DFID -Department for International DevelopmentEWS -Economically Weaker Sections

SIDA - Swedish International Development Co-operation Agency

UNICEF - United Nations International Childrens Emergency Fund

DWASA -Dhaka Water and Sanitation Authority

DMRC - Delhi Metro Rail Corporation Limited

DPR -Detailed Project Report

GDP - Gross Domestic Product

HDI -Human Development Index

IATA -International Air Transport Association

IDBI -Industrial Development Bank of India


7/146

vi /PPPs In Water Sector

IFC -International Finance Corporation

IFI -International Financial Institutions

IIFCL -India Infrastructure Finance Company Limited

IMF - International Monetary FundIIPDF -India Infrastructure Project Development Fund

INCAP - Infrastructure Corporation of Andhra Pradesh

INRS -Institut National de Recherche Scientifique - Urbanisation

JBIC -Japan Bank for International Cooperation

JNNURM -Jawaharlal Nehru National Urban Renewal Mission

JUSCO -Jamshedpur Utilities and Services Company

KL - Kilo Litre

KUWSDB - Karnataka Urban Water Supply and Drainage Board

LIG -Low Income Group

MCC -Mysore City Corporation

MDG -Millennium Development Goals

MoA -Memorandum of Agreement

MPEB -Madhya Pradesh Electricity Board

MLD -Million Litres per Day

NELP -New Exploration Licensing Policy

NHAI -National Highways Authority of India

NHDP -National Highway Development Programme

NHPC -National Hydro Power Corporation

NTADCL -New Tiruppur Area Development Corporation LimitedNTPC -National Thermal Power Corporation

NVDA -Narmada Valley Development Authority

NWP -National Water Policy

PFI - Private Finance Initiative

PPWSA - Phnom Penh Water Supply Authority

PNGRB - Petroleum and Natural Gas Regulatory Board

PPI - Private Participation in Infrastructure

PPIAF - Public-Private Infrastructure Advisory Facility

PPP - Public Private Partnership

PSC - Production Sharing Contract


8/146

PPPs In Water Sector/vii

PSD - Private Sector Development

PSI - Public Services International

PSIRU - Public Services International Research Unit

PSP - Private Sector ParticipationPUPs - Public Public Partnerships

PPP - Purchasing Power Parity

RIL -Reliance Industries Limited

RPL -Reliance Power Limited

RTI -Right to Information Act

SAGUAPAC - Cooperativa de Servicios Publicos Santa Cruz Ltda

SANAA - Servicio Autonomo Nacional de Acueductos y

Alcantarillados

SMHPCL - Shree Maheshwar Hydro Power Corporation Limited

SOEs - State Owned Enterprises

TA - Technical Assistance

TNSIC - Tamil Nadu State Information Commission

TWAD - Tamil Nadu Water and DrainageTBS - Tarun Bharat Sangh

TWSSP - Tiruppur Water Supply and Sewerage Project

UDF - User Development Fees

UIDSSMT - Urban Infrastructure Development Scheme in Small and

Medium Towns

ULB - Urban Local Body

UMPP - Ultra Mega Power Plant

UN - United Nations

UNDP - United Nations Development Program

UNRISD - United Nations Research Institute for Social Development

VGF - Viability Gap Funding

VRS - Voluntary Retirement Scheme

WB - World BankWRA - Water Regulatory Authority

WSP - Water and Sanitation Programme

WWW - World Wide Web


9/146

viii /PPPs In Water Sector


10/146

PPPs In Water Sector/ix

ForewordTHIS BOOKLET should be read by everyone concerned with the

development of infrastructure. It patiently lays out the detailed reality of

what happens when public works and services are handed over to the

private sector in the shape of public-private partnerships (PPPs). It makes

brutally clear the extra costs involved, as a result of the private sectors

need to pay higher returns to investors, and the lack of evidence of any

compensating efficiency gains. It unpicks the seams of complex contracts,

renegotiation, evasion, secrecy, selectiveness, avoidance of responsibility,

incompetence and corruption that hold together this latest form of

privatisation. It broadcasts the outraged voices of elected representatives

around the world, north and south, who have discovered the political and

economic swindles of PPPs. It reminds us that we have no need of PPPs

to develop much-needed infrastructure, that we can construct these systems

more effectively using public finance, and run them through participatory

public services.

It is published at a crucial moment not only for India but for the rest of

the world. There is a swarm of companies and institutions circling the

world in search of profits to be made from PPPs in infrastructure. Indias

commitment to a surge in infrastructure investment is one of the greatest

opportunities on the planet, a great stream of public spending stretchingout for decades. Investment funds, both Indian and international, are

promising that they can make returns of 23-25% from infrastructure

projects in India - if they are carried out through PPPs.


11/146

x /PPPs In Water Sector

These companies and investors need to work very hard to ensure that

PPPs are used, because people and elected representatives across the world

are deeply suspicious of PPPs. The economic crisis has made this worse -

private finance is even more expensive now (2%-3% more expensive than

public finance in India, as the booklet points out), the reputation of private

banks and financial organisations is extremely low, and many PPPs have

hit their own financial crises because banks are reluctant to lend them any

more money. In a glaring contradiction of their own claims for the

superiority of market forces, PPPs have been happy to be bailed out by

governments - including the UK, France, and India - setting up special

funds, supported by government finance, to bail out PPPs by lending them

public money - the opposite of the way PPPs are supposed to work.

In addition to state financial support, the companies are receiving

extraordinary propaganda support from international institutions. At the

start of December 2009, a meeting was held in Geneva to agree on the

creation of a global body to promote PPPs and counter the public hostility.

The idea for this originated at an international conference on PPPs, heldin May 2009, involving the World Bank, Asian Development Bank (ADB),

United Nations Economic Committee for Europe (UNECE) and various

governments and PPP units, including Indias.

The meeting was presented with a lucid picture of a global rejection of

free-market capitalism, including PPPs, in the wake of the economic crisis:

Discontent, even outright hostility, among the general public againstthe capitalist system has gained ground during the crisis... The system

is mistrusted, and confidence in capitalism and its future is low... The

crisis appears to have had its roots in the era of deregulation and is

replaced by the growing role of the state in managing financial capitalism

and exercising accountability previously absent in the system; ... PPPs

are equated with the now discredited privatisation and financial

liberalisation1

The same presentation eloquently set out how the crisis has increased

awareness of the economic, social and environmental needs for public

spending on infrastructure:

The potential demand for social infrastructure such as public lighting,


12/146


13/146

xii /PPPs In Water Sector

Commonwealth Development Corporation (CDC) reports: CDCs

achievements in 2007 were impressive by any measure, outperforming

the Morgan Stanley Emerging Markets Index by 20%.3

In this context, the people of India and the rest of the world need thishonest, thoroughly researched booklet which sets out the realities of PPPs.

David Hall

Director, Public Services International Research Unit,

University of Greenwich,

LONDON (UK)

email - [email protected]

1. Impact of the Global Financial Crisis - What Does It Mean for PPPs in the Short to Medium

Term? Presentation by Geoffrey Hamilton Chief of Section, Economic Cooperation and

Integration Division, UNECE. 20 May 2009 to KDI/ADB/ADBI/WBI conference

Knowledge Sharing on Infrastructure Public-Private Partnerships in Asia 19-21 May 2009Seoul, Korea, Source URL - http://pima.kdi.re.kr/eng/new/event/090619/9-4.pdf, South

Korea, May 2009, Source URL - http://pimac.kdi.re.kr/eng/new/event_list7.jsp

2. Source URL - http://www.swedfund.se/en/investments-and-new-markets/meet-the-entrepre-

neurs-who-have-already-invested/health-care-in-ethiopia

3. Source URL - http://www.cdcgroup.com/


14/146

PPPs In Water Sector/xiii

Preface

THE BOOKLET finds its context in the discussions going on in the country

over the past few years on the existing infrastructure bottlenecks and howthese bottlenecks can be a major hurdle in achieving higher Gross Domestic

Product (GDP) growth rates. It is a widely held belief that if India has to

match the GDP growth rates of the other developing economies like China,

Brazil, South Africa and other such countries it would have to create world-

class infrastructure in sectors like water, energy, transport, and that too at

a fast pace.

One of the models being used widely for infrastructure development is

Public-Private Partnerships (PPPs). PPPs are being promoted as a key, if

not the main, vehicle to achieve the required growth in infrastructure,

including that in the water sector which is the focus of this booklet.

PPPs are supposed to provide solutions to most of the existing problems

related to infrastructure projects - in both execution and operation.

Currently, there are PPP projects in almost all the sectors including roads,ports, airports, water, sewerage, solid waste management and transport

among others. It is, therefore, about time to do a reality check on PPP

projects and their efficacy in addressing the problems faced by the public

sector water supply services. (It may be pointed out here that many of

these issues plague other infrastructure sectors as well.)

This booklet looks at various aspects of PPPs, beginning from why

PPPs have come to be regarded as the major approach for infrastructure

development in the country, the circumstances that lead to the change in

approach from direct privatisation to public-private partnerships, the current

status of the PPP projects that are being executed in India, especially in


15/146

xiv /PPPs In Water Sector

the water sector, to the current estimates and projections of investment

requirements for infrastructure development in India by governments and

International Financial Institutions (IFIs).

In some of the later sections, the booklet investigates PPPs fromdifferent aspects-- the various ways in which PPPs have been defined by

varied organisations and governments and what these definitions really

mean in the practical sense; the differences between privatisation and PPPs

in perceptions and real terms; and the various models that are being used

under the PPP approach.

In the next section, the booklet analyses the arguments given in favor

of PPPs, the structural issues with PPPs and the larger governance issues

associated with PPPs like transparency, peoples participation, access to

information and regulation. It also looks for evidence and experiences of

PPP projects in various parts of the world. It draws lessons that need to be

learnt and cautions that need to be taken on board while implementing

PPPs in public services like water and sanitation.

Further, the booklet studies the impact of the PPPs on some of thesocial obligation issues like the responsibility of provision, service delivery

and equity when the private sector is involved in delivery of public services

like water.

The booklet also provides an overview of the various projects and

policies that are being implemented to promote PPPs. These projects and

policies are being supported by IFIs, multi-lateral donor mechanisms andgovernments to encourage PPPs in infrastructure and public services

delivery.

In the final section, the booklet examines other models that are being

pursued in various parts of the world to provide better public services. In

this section we would look at some of the basic parameters required for

providing improved services like water and sanitation with low cost

implications.

The experiences from the countries, including India, where PPPs have

either been implemented or are under execution show that some of the

serious issues related to PPPs have gone unaddressed while recommending


16/146

PPPs In Water Sector/xv

the model for public services. To be more specific, the disadvantages of

the PPP model have not been discussed in the public domain.

Almost over the entire period that I have been associated with Manthan,

I have had several great opportunities to learn and understand not only thenuances of the water sector but also a lot about life itself. The journey has

been a phase of immense learning for me, and my interactions with

numerous individuals, groups, organisations (the list would be quite long)

during this period essentially form a big component of the learning process.

I would like to take this opportunity to thank all the people associated

with this work directly or indirectly. Special thanks are due to:

David Hall and Venu Govindu for their help in accessing reference

documents without which this study might not have carried enough weight;

team members at Manthan, specifically Shripad and Rehmat whose

comments and suggestions have benefitted this study immensely, who

always answered my calls of distress and pushed me ahead with their

encouragement, enthusiasm, wisdom, time and support; the board members

of Manthan for showing faith in our team and its work; since its inception,Manthan has been supported essentially by contributions of many

individuals, and I would like to thank all of them, and in particular

Arundhati Roy. Manthan is also currently being supported by Arghyam

Trust, Bangalore, and I would like to express thanks for this. Finally, thanks

to my wife, Chhaya, for bearing with me for all these months, while a lot

of my effort was directed towards finalising this report and had,

unknowingly, started taking a lot of things for granted.

Not to mention, I remain responsible for the interpretations and errors

in this report.

Gaurav Dwivedi

Manthan Adhyayan Kendra

Badwani (MP)


17/146

xvi /PPPs In Water Sector


18/146

Governance Issues - Real Concerns/1

Background

THE WORLD Bank India Country Assistance Strategy1

(CAS) 2004 noted,The Bank Groups Program Priorities will retain considerable continuity

with the FY02-04 CAS and the emphasis would be on Promoting Private-

Sector Led Growth. (Emphasis in original).

The CAS 2009-2012 reiterates, The main objectives of the 2004 CAS

- promoting private sector-led growth - were appropriate and remain largely

valid.2

This observation comes in spite of the fact that the Bank realises that

it has to face serious criticisms and disapproval from a large number of

civil society groups and grass-roots movements in India regarding its

priorities and strategies of promoting privatisation.

The CAS 2009 - 2012 observes, A World Bank Independent Tribunal

took place in September 2007, with the motto World Bank out of India,

showing the strong feelings against the WB. The reasons for such strong

criticisms and feelings, the Bank report notes, are, coming out of the

structural adjustment experience and the [Banks] view of privatization as

a panacea for all public sector ills.3

Still, the Bank insists, The WB [World Bank] is working on the policy

framework, fiscal management, and viability gap funding, while the IFC

[International Finance Corporation] is helping to ensure that PPPframeworks work for private companies and supports private sector

companies in preparing transactions. This work, which has so far been

strongest in infrastructure (power, transmission, roads, irrigation and rural

infrastructure, urban development), will be extended to agribusiness, health


19/146

2 /PPPs In Water Sector

and education, and renewable energy.4 (Emphasis added). Moreover,

work to further strengthen the financial sector and to promote private

sector development will continue.5

The Asian Development Bank (ADB) has adopted a similar strategy:

To catalyze investment, ADB has been supporting the

Governments efforts toward promoting public-private partnership

(PPP) in infrastructure. Technical assistance (TA) is being provided

to several state governments and central (infrastructure) line ministries

to build capacity for identifying and appraising projects for the PPP

mode of finance.6 (Emphasis added.)

Therefore, the original strategies for promoting privatisation remainlargely valid, although the approach to promote privatisation seems to be

shifting largely towards Public-Private Partnership (PPP) frameworks.

Googling7 for public-private partnerships water on the World Wide

Web (www) yielded about 3,450,000 results in 0.18 seconds flat. The

numbers cranked up by Google were impressive. But the more interesting

point to be noted in this exercise was the varied kind of organisations that

are working on PPPs. This showed the amount of interest in the subject

among the various groups which included, among others, government

overseas aid agencies, United Nations agencies, policy research institutes,

government agencies and ministries, newspapers, educational institutes,

non-profit groups, industry federations, PPP promoting agencies, water

multinational corporations, World Economic Forum, international financial

institutions, public sector unions and consultancy firms. The Google searchis only one of the indicators of the extent and kind of interest as well as

the hype that surrounds PPPs at present. But the question is - why Public-

Private Partnerships?


20/146

Why PPPs?/3

Why PPPs?

AS THE World Bank CAS noted privatization as a panacea for all public

sector ills, privatisation or Private Sector Participation (PSP) was promoted

as a cure-all for providing efficient and financially sustainable public

services in sectors like water, energy, transport, health, education, etc.

For over a decade or so now, it has been a widely held belief that privatisation

is the only solution to bringing improvements to the public services in

terms of investments, efficiency, service delivery, accountability, etc.Back in the 1990s, an IFC8 document concluded, may be a bit hastily

at that time, The wordprivatization, almost unknown a decade ago, is

here to stay, whether as the necessary first step on the long road toward

a competitive market economy in former socialist countries, or as the key

to unlocking private sector-led growth in Latin America, Asia and

elsewhere. IFCs mandate is to further economic development by

encouraging the growth of productive private enterprise in the developing

world, and over the last decade privatization has become one of our staples.

We have played a central role in the transfer to private ownership of

enterprises in Russia and other countries of the former Soviet Union, and

we are now playing that role in the privatization of large state farms in

Russia. (Emphasis in original). In the same document, there was also a

beautiful story on how privatisation works, the factors involved and the

kind of benefits it brings to the people. See Box-1.

However, close to a decade and half later, evidence from several

privatised projects show that the privatisation model has failed to provide

long-term and sustainable solutions to the existing problems, especially in


21/146


the water sector. In fact, many of the high-profile privatisation projects

have collapsed. This has happened due to severe political and social

backlash that these privatisation projects have had to face because of

steep increase in prices, inefficient operations and poor service quality.9

In fact, one of the officials of the World Bank who was involved with

the Russian and Mexican privatisation programs has stated that pushing

privatisation was a mistake.10

See Box-2.

And, another official had earlier realised that The last decade has

largely been a lost decade - a naive view that the private sector will take

care of infrastructure.....John Briscoe, WB Water Specialist, Sept 2004.11

On the other hand, the multi-national corporations in water business

like Veolia, Suez and SAUR have started demanding more support from

the IFIs and the developing country governments. For the support soughtwas in terms of assured revenues, intervention procedures from the IFIs

to off-set risks, substantial grants and soft loans and partnership with

private companies towards the goals of profit making from the water

business. See Box-3.

To privatize, said an agency (IFC)official, is to drive a two-horse cart.

The cart is the enterprise in question.One horse is called Political Goals andis flighty and fickle; the other is called

Economics, and is slow and steady.

They have to pull the cart along the

Road to Privatisation, which is a roughboulder-strewn track. The cart is full

of cases of vintage wine, which isunfortunate because the horses, as

often as not, are pulling in different

directions. The bottles of wine, whichcan be enjoyed only when the cart

reaches its goal, are labelled improved

efficiency, high sales price, effective

corporate governance, economicinvestment, and so on.

Only the most skilful driver cannegotiate this track: up the hill of

Box -1

Privatisation is a Two-Horse Cart*Vested Interests (cases may have tobe jettisoned here, and some horses

arent strong enough to make it),across the stream of Xenophobia

(another case or two bumps off the

back). Some carts are too weak andfall apart before they get to

Privatisation. Sometimes it makes

sense to give the flighty horse its head

and fly the trail headlong, abandoningcase after case on the way; some-

times it is possible to whip him intoshape to follow his steadier partner.

And many drivers simply give up, cut

the horses loose, climb down and startback down the trail, hoping to find

solace in the odd bottle that hasnt

smashed.

*International Finance Corporation

(1995), Preface


22/146

Why PPPs?/5

Still, in continuation of their approach of promoting the free market

and commercialisation, the IFIs that were promoting privatisation as asolution realised that a different strategy would be needed to keep the

privatisation model viable. The IFIs like the Asian Development Bank (ADB),

the World Bank, International Finance Corporation (IFC) and Public-Private

Infrastructure Advisory Facility (PPIAF) have made a shift from

considering privatisation as a panacea for all public sector ills to adopting

a private sector led growth, backed by the public sector investments in

the form of Public-Private Partnerships (PPPs).

Indicating the above shift in the strategy a 2005 World Bank Progress

Report on Infrastructure12 and a later Bank study on Urban Infrastructure

Finance from Private Operators13 found that the private sector would not

be able to fill the investment gap in infrastructure and public sector funding

would be important further emphasising the need for public sector

investments.

The current infrastructure strategy of the Bank, hence, when compared

to the 1980s and 1990s shows a clear shift from dependence on the

private sector to deliver in terms of investments and services to encouraging

public-private partnerships.

The Admittance of a MistakeMore than a decade later, the World Bank official admits privatisation was a

mistake. The former World Bank Country Head India, Isabel Guerrero, in an

interview to Tehelka in October 2007, stated, Well, probably we sometimes getaccused for well-deserved reasons...There has been some truth in the past to

allegations. We did push privatisation. I was myself part of the team that went

to the former Soviet Union, post-collapse, and we all said privatisation is a verygood way out. And then we realised that it was a mistake. First of all becausethere were no institutions in the post-collapse Soviet Union and we did not

realise the importance of institutions. You dont have the right governance,

privatisation gets captured by a few and then you create inequalities. Rightbefore I left Mexico, I wrote a paper saying exactly that: privatisation of the

early 1990s, probably supported by the World Bank, resulted in a few peoplebecoming very rich, getting too much. And they hurt. Mexico has the highest

telephone rates in the world because it is a monopoly and that was a result of

poor privatisation.*

*Privatisation puts too much wealth in too few hands, Isabel Guerrero interview to Tehelka, 13th

October 2007, Source URL - http://www.tehelka.com/story_main34.asp? filename=Bu131007

PRIVATISATION.asp

Box -2


23/146


MNC DemandsVeolia had expressed concerns

regarding the financial viability of

serving the poor in developingcountries rather than in big citieswhere the GDP/capita is not too low.

The prospects of profit depend either

on sufficient and assured revenuesfrom the users of the service - which

excludes the poor - or on governmentguarantees of payments for the

service, in effect subsidies.*

The Suez CEOs presentation duringthe Suez action plan 2003 - 2004 putthe companys approach towards

developing country projects in the

following terms:

reduce investments,

freeze financing in strong

currencies,

with multilateral institutions,

perfect appropriate intervention

procedures,

and, ensure that concession

granting authorities and partners

Box - 3

stick to their commitments, failing

which prepare to depart*.

- Gerard Mestrallet,

CEO Suez,Suez Action Plan 2003 - 2004

The CEO of SAUR Internationalmade the following demands:

Unreasonable contractual con-

straints Unreasonable Regulator

power and involvement.... An empha-

sis on unrealistic service levels At-

tempts to apply European standards

in developing countries .The de-mand for connections for all in de-

veloping countries ... substantial grants

and soft loans are unavoidable to meet

required investment levels The role

of the World Bank is to coordinate the

supply of these soft loans and subsi-

dies, tell developing countries what to

do, and act as a partner to private

companies

- J.F. Talbot,

CEO SAUR International, the fourth

largest water company in the world,

2002**

*Hall, David (2003a)

**Is the Water Business Really a Business? Mr J.F.Talbot, CEO Saur International World BankWater and Sanitation Lecture Series 13th February 2002, Source URL - http://www.worldbank.org/wbi/B-SPAN/docs/SAUR.pdf


24/146

PPPs in India/7

PPPs in India

THE PREFACE to the Eleventh Five Year Plan document states, Poor

quality of infrastructure seriously limits Indias growth potential in the

medium term and the Eleventh Plan outlines a comprehensive strategy for

development of both rural and urban infrastructure.14 The Eleventh Plan

estimates that to maintain an average annual growth rate of 9%, the

investment in infrastructure would have to rise from Rs 2,59,839 crore in

2007-08 to Rs 5,74,096 crore in 2011-12 at constant 2006-07 prices,

aggregating to Rs 20,11,521 crore over five years.

15

In the terminal year,this works out to be 9% of the GDP, up from 5% of the GDP in 2006-07.

This is a huge amount, and the Government claims that it is not likely

to be able to mobilise this without increased contributions from the private

sector. Moreover, it argues that Since various social sector and livelihood

support programmes for the poor will have the first charge on public

resources, the strategy for infrastructure development has been designed

to rely as much as possible on private sector investment through various

forms of PPPs.16, 17

At the time of writing this booklet (November 2009), there were around

450 PPP projects listed for implementation under Public-Private

Partnerships database provided by the Department of Economic Affairs,

Ministry of Finance, Government of India on its website.18 Out of these

450 projects, the majority of them, 271 projects, are under the road sector,25 projects are listed under the energy sector, 43 under ports, 71 urban

development, 5 airports and 4 under railways. The list places the water-

related projects under the urban development sector, in which the number

of water and sewerage projects is 9.


25/146


These projects are as follows:

1. Vishakhapatanam Industrial Water Supply Project, Andhra Pradesh

2. Adityapur Water Supply Phase I, Jhankhand

3. Karnataka Urban Water Sector Improvement Project4. Dewas Industrial Water Supply Project, Madhya Pradesh

5. Water Supply Augmentation at Khandwa, Madhya Pradesh

6. Reuse of Recycled Water Tertiary Treatment Water Plant Rajasthan

7. 100 MLD Sea Water Desalination Plant Reverse Osmosis Chennai

8. Alandur Sewage Project, Tamil Nadu

9. Tiruppur Water Supply Project, Tamil NaduHowever, it is not clear as to why so few projects related to water

sector have been listed on the ministrys website, even though there are

quite a number of PPP projects currently under various stages of execution.

If the earlier database of projects (May 2009) on the same website is

compared with the database of October 2009, there are three new projects

but the Vishakhapatnam Industrial Water Supply Project which was in the

earlier database of May 2009 is however missing from the list of October2009 without any reasons or clarifications for the removal. For a detailed

list of PPP projects in water sector in India complied by Manthan see

annexure-1. The total project cost of all the projects in the PPP database

comes to Rs 1,35,876 crore. The lions share of the total projects as per

the costs goes to the roads and the ports sectors, with urban development

getting the least.

The list in the annexure-1 shows the number and type of PPP projects

that are coming up in the water sector. The adoption of the PPP model for

project implementation is looked upon as one of the major reforms under

various projects and schemes run by the Central government and the IFIs

for improving the public sector water services. Annexure-2 gives a list

of policy level interventions to promote PPPs that are supported by IFIs

like the World Bank and ADB, and by multi-donor mechanisms like PPIAF,IFC and WSP. There are also schemes like the Jawaharlal Nehru National

Urban Renewal Mission (JNNURM) and the Urban Infrastructure

Development Scheme in Small and Medium Towns (UIDSSMT) that

encourage PPPs in varied urban services.


26/146

PPPs - Estimates and Expectations/9

PPPs - Estimates and Expectations

ESTIMATES OF projected investments in infrastructure for the 11th Planperiod have been arrived at by various agencies in India like the Planning

Commission of India and others like the World Bank. These estimates

project huge investments to improve infrastructure. These estimates also

expect the private sector to provide capital to fill in the crucial gaps in

investments but with a note of caution because of earlier disappointments.

The Eleventh Plan document 2007-12 of the Planning Commission ofIndia gives the sector-wise investment anticipated in the Tenth Plan and

projected for the Eleventh Plan in Table-1.

For the water supply and sanitation and irrigation sectors specifically,

the projected investment in infrastructure during the Eleventh Plan, and

the share of public and private sector investments, the document gives

figures shown in Table-2.

The World Bank too has provided its estimates for the investments

required but gives a twist to projections in the wake of global economic

downturn:

Recognizing inadequate infrastructure as a crucial constraint to

faster growth and inclusive development, the Plan foresees an increase

in total investment in infrastructure to about 7.65% of GDP during the

plan period. At the exchange rate used in the Plan (Rs 40/US$), this

amounts to a total of US$ 515 billion, of which US$ l55 billion, or 30%,

expected to come from the private sector. The Eleventh Plan identifies

as one of the risks a downturn in the global economy. This risk has

now materialized and growth and investment projections are being

revised downwards.19 (Emphasis in original.)


27/146


Inspite of the global downturn, the Planning Commission of India20 isoptimistic on the sharing of investment by public and private sectors:

the shares of public and private investment in total infrastructure

investment during the Eleventh Plan are projected to be about 70 per

cent and 30 per cent respectively; in contrast with 82 per cent and 18

per cent respectively, during the Tenth Plan. However, if we focus on

the increment in investment in the Eleventh Plan over the Tenth Plan,

increased private investment is expected to provide 38.3 per cent ofthe increase and the share of private sector in total investment will

increase from 18.5 per cent to 29.7 per cent.

It further states, If these initiatives succeed, India would deliver a

large programme of Public-Private Partnerships.21

The urban sectors that are included for the development of such projects

include sectors like electricity, roads, urban transport, water supply,

sewerage, solid waste management and other physical infrastructure.22

The above-mentioned sectors are also the ones facing problems due to

low existing capacity and resource crunch for further capacity increases.

For instance, the World Bank notes, over the last five years, while GDP

Electricity (incl. NCE )* 666525 166.63 32.42

Roads and Bridges 314152 78.54 15.28

Telecommunication 258439 64.61 12.57

Railways (incl. MRTS) 261808 65.45 12.73

Irrigation (incl. Watershed) 253301 63.32 12.32

Water Supply and Sanitation 143730 35.93 6.99

Ports 87995 22.00 4.28Airports 30968 7.74 1.51

Storage 22378 5.59 1.09

Gas 16855 4.21 0.82

Total (Rs crore) 2056150 514.04 100.00

*NCE - Non Conventional Energy#Source-Government of India (2008), Table No-12.3, Page-257, (At 2006-07 prices)

Rs croreUS$ billion

@ Rs 40/$

Shares (%)

Eleventh Plan (Projected Investment)

Sectors

Table-1: Sectorwise Investment Anticipated


28/146

PPPs - Estimates and Expectations/11

growth averaged about 8% per year, growth in electricity generation and

supply averaged only 4.9% per year. The national and state highway

networks have failed to keep pace with the tremendous growth in demand

for road transport: only about 30% of state highways are two lane, more

than 50% are in poor condition, ..only half the population has access to

safe drinking water, less than a third has access to sanitation facilities and

40% of Indias 600,000 villages are not connected to a road .23

The current trends and projections suggest that the Government of

India and the IFIs look to promote private participation through PPPs as

the major model to achieve the goals of infrastructure development.But for PPPs to achieve the stated goals, there are some hard questions

that need to be asked. In the short-term context, some of these questions

would be - would private sector be interested and have the appetite to

invest in riskier projects in the developing countries?; are governments

ready to handle the complex technical, financial and structural concerns

that come with PPPs?; and what happens to the larger governance and

social issues related to sectors like water and sanitation. We will look at

some of these issues in the later sections.

For now, let us have a look at how some agencies have defined PPPs.

Centre 13617 24759 9.77States 97886 228543 90.23

Total Irrigation

(Watershed Incl.) 111503 253307 100.00

Centre 42316 42003 29.22

States 21465 96306 67.00

Private 1022 5421 3.77Total Water Supply &

Sanitation 64803 143730 100%

*Source-Government of India (2008), Table No-12.4, Page-258. (At 2006-07 prices)

Tenth Plan(Anticipated

Expenditure.)

Total Eleventh

PlanShares (%)

Sectors

Table - 2: Share of Publ ic and Private Sector Investments


29/146



30/146

What is a PPP?/13

What is a PPP?

Some Definitions of Public-PrivSome Definitions of Public-PrivSome Definitions of Public-PrivSome Definitions of Public-PrivSome Definitions of Public-Priv ate Partnershipsate Partnershipsate Partnershipsate Partnershipsate Partnerships

VARIOUS GOVERNMENTS, PPP agencies, academics, policy researchinstitutes and non-profit groups have defined Public-Private Partnerships

in different ways. Some of these definitions show the varied aspects related

to PPPs.

The Government of India has defined PPPs thus:

Public-Private Partnership (PPP) Project means a project based

on a contract or concession agreement, between a Government or

statutory entity on the one side and a private sector company on theother side, for delivering an infrastructure service on payment of user

charges.24

The report of the PPP Sub-Group on Social Sector, Planning

Commission of India, defines PPPs as follows:

Public-private partnership (PPP), on the other hand, is an

approach under which services are delivered by the private sector

(non-profit/for-profit organizations) while the responsibility for

providing the service rests with the government. This arrangement

requires the government to either enter into a contract with the

private partner or pay for the services (reimburse) rendered by the

private sector. Contracting prompts a new activity, especially so, when

neither the public sector nor the private sector existed to provide the

service.25

The Canadian Council for P3s (a member-sponsored organisationinvolved in the promotion of P3s26) defines P3s as a cooperative venture

between the public and private sectors, built on the expertise of each

partner, that best meets clearly defined public needs through the appropriate

allocation of resources, risks and rewards.27


31/146


Some Key Elements of PPPsThe above definitions explain some of the basic principles underlying PPPs.

We identify some of the key elements of PPPs -1. Contract/agreement between government and private players

2. Used in the delivery of infrastructure services by a private operator

3. Operates on commercial principles

4. Delivers services on payment of user charges

5. Payment by the public agency/government for bulk delivery of service

6. Full cost recovery, at least the O&M charges

7. Responsibility for providing services rests with the government

8. Division of risks, roles and responsibilities between the public and private

9. Need complex regulatory mechanisms.

Box - 4

But contrary to the definitions given by the PPP-promoting agencies,

some of the academics and research studies have pointed out that the

term public-private partnership is nothing more than an expression used

to avoid the terms contracting out or privatization in favor of speaking

about partnerships. That may be a part of a general trend within public

management of needing to renew the buzzwords from time to time, or

perhaps it reflects the practice of advancing the same policy but under a

different and more catchy name.28

A study by the Canadian Centre for Policy Alternatives clarifies:

P3s are a form of privatization in which a private company (or

consortium) takes over the design, building, operation, and in manycases financing, of public infrastructure projects (hospitals, bridges,

etc).29

For some of the key elements of PPPs see Box-4.

Lets now consider the legal definition of partnership, according to the

Indian Partnership Act, 1932, Partnership is the relation between persons

who have agreed to share the profits of a business carried on by all or any

of them acting for all .30

The Collins English Dictionary defines partnership thus a contractual

relationship between two or more persons carrying on a joint business

venture with a view to profit, each incurring liability for losses and the


32/146

What is a PPP?/15

right to share in the profits.

In fact, PPPs have been named differently in different places. Forinstance, in the UK PPPs are known as Private Finance Initiatives; in

places like UK, Australia, New Zealand, PPPs have also been called as

alternative financing and procurement projects, alternative service

delivery models; and in Canada PPPs are popularly known as P3s. For

some of the types of PPPs see Box-5 and annexure-6.

Types of Public-Private PartnershipsPublic-Private Partnership is a broad term and its different aspects may be

implemented at various levels while executing a project. PPPs can be of variousforms, right from construction and management contracts like Build - Own -

Transfer (BOT), Build - Own - Operate (BOO), Build - Own - Operate - Transfer(BOOT) to specific contracts for service delivery like Operations and Mainte-

nance contract, Design-Build-Maintain/Operate contract, Management contract,

Turnkey contract and many other forms.

Box - 5


33/146



34/146

Privatisation and PPPs-What is the Difference?/17

Privatisation and PPPs-What is the Difference?

AS SEVERAL experiences and evidences demonstrate the problems and

issues associated with privatisation or private sector participation, it is

crucial to understand the differences between privatisation and Public-

Private Partnership model. It is also important to understand whether the

difference is literal or figurative or whether the models are practically

different in their operational and structural aspects.

During the early years of the privatisation wave in the 1990s, the IFIs

as well as the governments tried to implement the privatisation modelwidely for infrastructure development and service delivery. This model

was presented as the solution for improving urban infrastructure, service

quality, lower tariffs, bringing in new investments and other benefits in

the developing countries where the public sector is generally seen as

inefficient, corrupt, and lacking in managerial and technical skills with

low investment capacity.

Later on, several places around the world witnessed an increasing

number of incidents of public protests, social unrest and campaigns against

privatisation in the water sector. There were huge losses to private

companies in Argentina, the departure of the private company from Metro

Manila Water Supply Project, crisis in Atlanta water concession, and social

backlash and rioting in places like Cochabamba, Jakarta and El Alto. Such

developments began to prove that the private sector participation (PSP)model in the water sector had failed in many of the developing as well as

the developed countries. There were severe political and social backlashes

that the private corporations had to face for failing to deliver on the promised

contractual obligations in many countries. This also meant that the Private


35/146


Sector Development (PSD) strategy promoting private participation inpublic water services was failing. See Table-3 for some cases. For more

examples, please see failed privatisation projects database on

www.manthan-india.org.

As discussed earlier, this was the period when private corporations,

which were demanding profits, risk off-setting mechanisms, soft loans

and grants, began retreating from many developing countries. It becameclear that it would not be easy to earn assured revenues and profits from

water operations without public funds - either from the IFIs or from the

developing country governments. The private companies, hence, needed

public sector support to run their businesses and earn profits. They realised

S.N. Failed Projects Reason

1. Buenos Aires (Argentina) Frequent price increases,

Poor service quality,

Failure to honour contractual commit-

ments,

Financial problems.

2. Manila West (The Philippines) Price hikes,

Failure to extend water connections topoor areas,

No investments,

Increase in tariffs,

Non-fulfillment of other contractualobligations.

3. Atlanta (USA) Higher water rates,

Deteriorating quality,

Failure to make new investments.

4. El Alto (Bolivia) Refusal to extend potable water supply

to the poor areas of the city,

Failure to fulfill contractual obligations

5. Varages (France) Public complaints against rising waterprices,

Deterioration in Water Quality,

Problems in water supply network

Table - 3 Failures and Reasons - Some Cases


36/146

Privatisation and PPPs-What is the Difference?/19

they would have to take the support of and work with the public sector to

cut down on the risks and to guarantee revenue streams. Public sector

support was also needed to avoid and mitigate the impacts of public

backlash and political protests. It also meant that by taking the publicsector on-board the private corporations would ensure that the public

takes the risk and private takes the profits. This was the period when the

PPP model began emerging as an alternative to exclusive Private Sector

Participation (PSP) or privatisation of municipal services.

Even though it is suggested that there is a marked difference between

privatisation and the PPP model, a detailed analysis and understanding ofboth these models shows that the difference is superficial and at the

fundamental level both are similar.

The ADB acknowledges in one of its reports that there is, in fact, no

difference between the two. It states, This approach of developing and

operating public utilities and infrastructure by the private sector under

terms and conditions agreeable to both the government and the private

sector is called PPP or P3 or private sector participation (PSP).31

The Report of the Working Group on Water Resources, Ministry of

Water Resources, Government of India, takes a similar approach, The

National Water Policy of 2002 (NWP) recommends private sector

participation, i.e., Public-Private Partnership.32

The ADBs website lists under the Champion Presentations - PPP

projects and arrangements, the PSP activities and projects that the bankpromotes.33

David Hall of PSIRU, University of Greenwich, UK, notes on PPPs,

As privatisation became politically controversial, even in the UK, new

terms were introduced. Public-private partnership, abbreviated as PPP,

was created to present the same forms of involvement of the private

sector as more a collaborative, technical exercise rather than an aggressivetransformation of relations. A similar term, private sector participation

(PSP) has also been widely used, especially by the World Bank and others

in the context of developing countries. In both cases, the term is not a

legal or technically exact phrase, but rather a replacement for the old


37/146


general Thatcherite use of the word privatisation. The vast majority of

PPPs, for example, are not partnerships in any legal sense, but simply

contractual relationships.34

Such categorisation of PSP activities under PPP arrangements clearlyshows that, in fact, PSP and PPP are synonymous terms and there are no

apparent differences.

Thus, despite the rhetoric for popular consumption which makes PPPs

look more community-oriented, accountable, public-sector controlled and

transparent, the terms privatisation and PPP remain same on the legal,

operational and structural levels. Even the documents and presentations

by the governments and international agencies use the terms synonymously,

which goes on to show that there is apparently no difference between the

two.


38/146

Arguments in favor of PPPs/21

Arguments in favor of PPPs

IN THIS section, we will examine some of the arguments in favor of

PPPs. The aim is to unravel the logic behind these arguments and, in this

context, to consider the experiences of PPPs when they have been

implemented without having been carefully thought of in the whole scheme

of things.

PPPs are cheaper

The first major claim in favour of PPPs is that the projects implemented

under this model provide a cheaper option for bringing in new private

investments, thus allowing the governments to save money spent oninfrastructure. However, in real cash terms this may not be the case for

PPP projects. Albeit, it might be the case that PPPs are more expensive

than traditional public procurement methods.35 This can be explained with

the help of following reasons36 :

profit margins are required to attract the private sector partners;

the cumbersome procurement process involved with larger P3

contracts is more expensive than the direct government procurementwould be; and the cost of capital (borrowing) is higher for the private

sector. The rates of return from the project, to attract the private

investors, are more than those that are applicable for the public

operators.

The private companies work to generate profits from their operations.

Social obligations and welfare are not part of their scheme. Any private

company that would work on a project would have profits included in thetotal cost of the project. For instance, the project company estimates the

base project return from Tiruppur Water Supply and Sewerage Project

(TWSSP), Indias first PPP project for industrial and domestic water

supply, at 20% per annum.37


39/146


The other problem with private investment is the cost of borrowing

the capital at higher interest rates. A Canadian Centre for Policy Alternatives

report states One of the problems with P3s is that the private partner

typically takes on the debt, and interest rates are higher for private

borrowers than for the government. Interest rates change over time, but

in general private sector bonds cost at least one percentage point more

than similar public sector debt. The main reason corporate debt is more

expensive is that corporations are more likely to default, making corporate

debt highly risky. Investors expect to be compensated for taking risks,

and therefore the market requires higher interest rates on corporate debt.

Even before the risks associated with the infrastructure project areconsidered, P3s will have a higher interest rate because of the higher risk

of private sector default.38

PPPs also generally have long and time-consuming procurement

processes, which makes such projects costly. According to the Treasury

in the UK, a PFI transaction is one of the most complex commercial and

financial arrangements which a procurer is likely to face. It involves

negotiations with a range of commercial practitioners and financial

institutions, all of whom are likely to have their own legal and financial

advisers. Consequently, procurement timetables and transaction costs can

be significantly in excess of those normally incurred with other procurement

options.39

With the present financial crisis and the ensuing credit squeeze for the

A bill from

Nagpur

Municipal

Corporation

showing high

water charges

after a private

company took

over operations.


40/146


private companies, the future of PPPs looks doubtful, with countries like

South Africa, Australia, Middle East, the USA and Mexico cancelling PPP

projects.

The World Bank report on India notes, The global financial crisis hasresulted in a tightening not only of international credit markets but also of

domestic credit markets in India, an increased cost of debt (by at least 20-

30% compared to earlier this year) for domestic investors, and a reduced

availability of both debt and risk capital for infrastructure projects. Against

this backdrop, the Eleventh Plan targets for increased private sector

investments in infrastructure, including through PPPs, may not materialize

to the extent desired. Even sovereign-backed entities such as IIFCL andPowerGrid are likely to face difficulties in accessing longer-term

financing.40 In India, the difference between the lending rates on the

capital borrowed from the banks by the public sector and the private

sector can be at least 2-3%, and depending on the risk factors involved

with the project the interest rates can increase further.41

The above reasons clearly show that PPPs cannot be cheaper and,

apart from these, there are other reasons that contribute in pushing PPP

project costs upwards. Some of these reasons are mentioned below.

(i) PPPs involve higher construction costs due to the deadline for

construction completion.

(ii) The transaction costs for PPP projects are higher because of the

longer gestation periods and procurement processes.

(iii)There are also chances of cost escalation during the projectimplementation phase due to unknown factors and changing

political and economic scenarios.

Consider the cost plus approach of the private hydro power projects

in India for setting tariffs. In such an approach, the tariff is based on the

recovery of all the costs incurred by the power generating company, plus

an assured profit. On the face of it, it may seem reasonable to presume

that an investor should recover the costs of establishing and operating thepower plant, but in practice this can lead to cost-padding. Investors, certain

that the approach to tariff-setting will cover their costs, can inflate their

costs artificially, so as to be able to claim a higher tariff and thus siphon

off funds.42 It should also be noted here that the cost plus approach might


41/146


be used in other water sector project also, not just for hydropower

projects.

Private Corporations are more effic ient

It is claimed that the major advantage of having PPPs in public projectsis the superior efficiency that the private corporations bring with them in

the design, construction and operation of the public services. It is argued

that privatisation brings about greater efficiency in the operations, in order

to save on project costs and to maximise the returns. The corollary to this

argument is that efficiency would lead to cost savings, which in turn

would lead to lower prices for the services delivered. But worldwide

experiences, specifically in the water sector, show that efficiency of

operation is not the monopoly of private sector - there are many examples

of efficient public water utilities. Nevertheless, this is a different issue,

which we will deal with later on. First lets see how efficient private

companies are and what happens to the cost savings and lower prices that

are usually associated with improved efficiency.

A 2009 Public Private Infrastructure Advisory Facility (PPIAF) studytries to address the debate on the improvement in performance of water

and electricity distribution using the private sector participation (PSP)

model using a data set of more than 1200 utilities in 71 developing and

transition economies. The sample includes 301 utilities with PSP and 926

state-owned enterprises (SOEs) over more than a decade of operation.43

On PSP in water and sanitation sector, the study asks a question, Because

Poor

installation

work done bythe private

operator in

Nagpurs

Dharampeth

zone.


42/146


the efficiency gains from PSP would translate into lower costs for the

operator, why is there no sign of the lower costs translating into greater

investment or lower prices? One of the possible answers to this question

is likely to be that the private operator may reap all the gains throughprofits, passing on none of the cost savings to consumers. Given the

young regulatory environments in developing countries, which often lack

sufficient capacity for supervising public-private contracts, this possibility

needs to be considered.44

On other parameters like collection rate, the study45 states, The study

finds no evidence for the water sector that PSP leads to an improvement

in the bill-collection rate over and above that for state-owned counterparts

and finds inconclusive evidence on its impact on residential coverage.

On residential coverage, the study found, In the estimation for the

full sample, residential coverage either decreases significantly or shows

no significant change across all types of PSP, regardless of the level of

private incentive implied. On service quality and distribution losses, the

study found that, results for operational performance and service quality,measured by water distribution losses and daily water service, are similarly

inconclusive.

On the debate on Private versus Public efficiency, a PSIRU study

comparing relative efficiencies of both found, There is a consistent stream

of empirical evidence consistently and repeatedly showing that there is no

systematic significant difference between public and private operators interms of efficiency or other performance measures.46

Various earlier studies, including those from the World Bank47, IMF48

and ADB49 , have also shown that there is not much difference in efficiency

of the public and the private companies.

In fact, earlier studies50 like from International Institute for Environment

and Development (IIED), London have shown that there are numerous

examples of efficiently managed public water and sanitation utilities across

the world, and recent trends and studies51 like from Trans National Institute

(TNI) and Corporate Europe Observatory (CEO) show that other models

to improve water services like Public-Public Partnerships (PUPs) are better


43/146


in providing services to the people rather than PPPs in various countries.

There are many examples of PUPs which have been participatory, cost

effective, efficient and transparent in many cities such as El Alto, Santa

Fe, Buenos Aires and in countries such as Honduras, South Africa, Brazil,

Malaysia and Indonesia among others.

Apart from the above, the other aspect related to efficiency and

incentives is the risk-averse behavior of the private companies. Since

there are private investors involved who, obviously, do not want to risk

their investments and returns, a private company is not interested in taking

risks on board while executing a project. For instance, in the water sector,

there can be resource risks, social risks and political risks apart from

technical, operational and financial risks. These risks are intricately linkedwith efficiency and incentives aspects, in the sense that a private operator

claims more incentives for better management of efficiencies and risks

than the public sector does. However, when there arent any substantial

risks that the private operator takes while executing a project, a major

controlling and regulating mechanism is lost. And if the company does not

have to manage risks, it would not be as efficient as it is required to be to

improve service delivery, cut costs and bring down prices. The overalleffect is that the private company has no incentives to work for in absence

of the risks like improving services, reducing costs or being more

productive. The risk transfer aspect of PPPs is dealt with in details later in

this booklet.

Poor road

resurfacing

work done by

the private

operator afterlaying water

supply pipelines

in Nagpur.


44/146


One of the many examples that show how efficient private companies

are is the case of the London Underground metro-rail system. This case

debunks the private-is-efficient myth. A PPP contract was awarded for

the London Metro to a private consortium to run the metro services in

London. The consortium not only failed to deliver services and carry out

maintenance works but also ran the metro into financial crisis, and then in

2007 went on to ask the UK Government to pay an extra 551 million to

cover the next years costs.52

Various other studies and examples show that it should not be assumed

sine qua non that private sector would bring in a superior efficiency in

operations and service delivery as compared to the public sector.

PPPs bring in Private Investments

One of the major claims supporting the PPP model is that, since such

a model uses private financing sources, the public resources that would

have been invested in the project are freed. These freed public resources

can then be spent on other policy priorities of the government.

David Hall writes in one of his reports, the budgetary constraintson government borrowing are political decisions, not set in stone The

financial crisis of 2008 has shown how governments everywhere are

increasing their spending and borrowing in order to support the financial

sector and the economy in general. The scale of this is far greater than

investments raised for public services through PPPs. The nationalisation

of one failed bank in the UK (Northern Rock) in 2008 increased the

UK national debt by 87billion - a figure greater than the combined

total value of all the PPPs and PFIs ever signed over the last 13

years in the UK (60billion) and the whole of Europe ( 32billion,

equivalent to 26billion).53 (Emphasis in original).

On the other hand, leaving the political angle aside, experiences with

many PPP projects show that public sector resources are not freed but

are sucked into PPPs for private profits, due to private sector inefficiencies,unaccountability and risk-averse behavior. Projects like Tiruppur, Nagpur

and Metro Manila Water Project prove this beyond doubt. In Tiruppur the

Government of Tamil Nadu has invested funds in the equity of the project

company to the tune of Rs 50 crore, Rs 25 crore have been provided as a


45/146


sub-debt, Rs 71 crore in Water Shortage Period Fund and Rs 50 crore as

Debt Service Reserve Fund apart from other guarantees and concessions.

Similarly, in Nagpur, even though the project is a PPP, the full investment

of Rs 22 crore over a period of 5 years would be provided by the

Government of India and the Government of Maharashtra and the privateoperator, Veolia Water, is hired to provide services to the Nagpur Municipal

Corporation for a fee of Rs 9 crore. In the Metro Manila Water Supply

and Sewerage Project, the Philippines government had to bear huge costs

once the private operator Suez terminated the contract when its demands

were not fulfilled. See Box-6.

Again, in the case of highly controversial Rs 12,200 crore HyderabadMetro Rail Project which was awarded to a consortium of Maytas Infra

Ltd., Nav Bharat Ventures Ltd., Ital-Thai of Thailand and IL&FS Ltd,

reports highlight the amount of public resources that were provided to the

private operators to earn profits. See Box-7.

Even huge multinational corporations, like banks and financial

corporations, that failed during, and to a large extent were even responsible

for, the current global financial crisis across the world due to their own

inefficiencies and corrupt practices have been now looking towards the

public sector for bail-outs.

Metro Manila Water Supply Project - Cost to the GovernmentIn Manila the privatisation of water services to a consortium of companies led

to huge cost consequences to the government of the Philippines. Because of

claiming to be financially incapacitated to run Maynilad and to deliver servicetargets, Maynilad filed for a notice of early termination, asking for the govern-

ment to refund its investments amounting to US$ 303 million.

Further, the government incurred other losses. Because Maynilad ran awaywith its non-payment of concession fees amounting to PhP10 billion, whichMWSS needs for its expenses and operations, the government was forced to

incur more debts to suffice its needs: US$ 21 million in 2001 from the Philippine

National Bank and Banco de Oro; US$ 260 million in 2003 from Keppel, Deutsche,First Metro Investment Corp., Rizal Commercial and Banking Corp., etc.; US$ 150

million in 2004 from BNP Paribas; and P 780 million in 2004 MWSS bonds.**Freedom from Debt Coalition (2007)

Box - 6


46/146


As a World Bank study points out, This Latin American experience,

which is the richest among all regions in terms of PPI (Private Participation

in Infrastructure) in water, offers a sobering prospect for PPI for financing

urban water around the world. Water is a difficult sector, and the risks

involved for both sides are significant enough to make it difficult to mobilize

substantial finance for water supply investments.54

The PPIAF55 study on PSP in water and sanitation sector states:

Proponents of PSP long hoped-and political leaders sometimes rashlypromised-that greater private involvement in utility services would lead to

vastly greater investment and thus to greater capacity and coverage. The

study finds mixed evidence on this issue and so cannot conclude that

investment always increases with PSP.

And the World Bank states, The Eleventh Plan foresees a major role

for the private sector through PPPs, but these may not materialize to the

extent hoped for in the aftermath of the global financial crisis and there

may be a shortfall in private sector initiatives56 and because of tighter

credit markets and the slowdown in global growth, private investment

and consumption growth may be cut substantially.57

The Hyderabad Metro ProjectA news report citing a letter of E. Sreedharan of Delhi Metro Rail Corporation

(DMRC), the project consultant for the Hyderabad Metro Project, in which

objections were raised to the Planning Commission of India on the tenderingprocess, stated: The Hyderabad Metro Project is being cited as a successfulexample of BOT approach. Here, I would like to caution that the example of

Hyderabad Metro is quite misleading as the negative viability gap funding hasresulted solely on account of 296 acres of prime land being made available to

the BOT operator for commercial exploitation. This is like selling family silver.

Apart from the fact that this might lead to a big political scandal sometimelater, it is apparent that the BOT operator has a hidden agenda which appearsto be to extend the Metro network to a large tract of his private land holdings so

as to reap a windfall profit of four to five times the land price, the letteradded.*

What happened later in the case related to Satyam Computers Limited,

Maytas Infras parent company, as they say, is history.

* DMRC chief had warned of scam in Hyderabad Metro last year, dated - 8.01.2009, Source URL

- http://www1.timesofindia.indiatimes.com/Business/DMRC_chief_warned_of_scam_in_Hyd

erabad_Metro_last_yr/articleshow/3948577.cms

Box -7


47/146


The following chart from a World Bank update shows that projects

are being affected by the financial crisis.58

The following Table-4 provides a brief overview of the public resourcesthat have been invested in some of the private-operated projects in India.

The table shows the extent and the kind of public resources that have

been invested in these projects which are contracted out to private

companies for their own profits. The important thing to note is that the

resources invested are not limited to capital itself; they include human

resources, expertise, guarantees, incentives, etc.

Consider the newly privatised hydro power projects (quite a few of

them appear in the Public-Private Partnerships database provided by the

Department of Economic Affairs, Ministry of Finance, Government of

India on its website59) in India in the context of PPPs and private

investments. The new regulations (January 2008) by the Central Electricity

Regulatory Commission (CERC) can have significant implications in this

regard. According to Shripad Dharmadhikary:

The CERC has allowed project companies to be reimbursed for

the tax that they have to pay on their income from return on equity.

Whatever tax is to be paid by the hydropower companies on their

return on equity is added to the amount to be recovered from the

consumers of electricity, and loaded on to the tariff. In other words,

Figure-3 investment commitments to infrastructure projects that

reached closure in developing countries in Aug-Dec by sector, 2005-08

Energy Telecom Transport Water and Sewerage

US$ billions

Source: World Bank and PPIAF, PPI Project and impact of financial crisis on PPI databases.

30

25

20

15

10

5

0

Aug-Dec 05 Aug-Dec 06 Aug-Dec 07 Aug-Dec 08


48/146


TiruppurWaterSupply

andSewerageProject

Tiruppur(TamilNadu)

Industrialanddomestic

watersupplyprojectin

TiruppurMunicipalityand

Panchayats,185mld,Rs

1023crore

ConcessiontoNTADCL

PublicFundsasequityand

debtfortheprojectfor

capitalexpenses

--

GovernmentGuarantees

UserChargesforthe

Servicesprovided

--

HumanResourcesfrom

PublicAgenciesintheform

ofengineers,staff,etc

Dharampeth

UninterruptedWater

SupplyProjectNagpur

(Maharashtra)

DomesticwatersupplyRs

22croreforuninterrupted

watersupplyinpartofone

zone

ManagementContractwith

VeoliaWaterIndia

PublicFundsforCapital

Investment,(80%from

JNNURMgrant,10%from

stategovt.and10%from

ULBSources)

PublicFundsfor

ManagementFees

PublicGuarantees

--

IncentivesfromPublic

Fundsforbetterperformance

HumanResourcesfrom

PublicAgenciesintheform

ofengineers,staff,etc

24x

7WaterSupplyProject

Mysore(Karnataka)

Dom

esticwatersupplyRs

190

croreproject24x7

watersupplytothecity,

ManagementContractwith

JUS

CO


Investment,90%ofTotal

ProjectCostfromJNNURM

Grant)

PublicFundsfor

ManagementFees

Pub

licGuarantees

UserCharges/Paymentby

MunicipalCorporationfor

Services

Ince

ntivesfromPublic

Fundsforbetterperformance

--

MaintenanceandLeakage

ReductionProjectBhopal

(M

adhyaPradesh)

DomesticwatersupplyRs

2.2croreforwaternetwork,

mainten

ancecontractfora

fewzon

esinthecity,

LeakageReduction

Contrac

twithJUSCO


Investm

ent,fullamountfrom

ADBlo

antoBhopal

Municipality

PublicFundsfor

ManagementFees

Public

Guarantees

--

--

--

KhandwaWaterSupply

Project(M

adhyaPradesh)

Domesticw

atersupply45

mldRs116

crorefor24x7

watersupplytothetown

Concession

Agreement

withVishw

aInfrastructure


Investment,90%ofTotal

ProjectCos

tfrom

UIDSSMT

Grant)

--

PublicGua

rantees

UserCharg

es/Incaseofa

shortfallpa

ymentby

Municipal

Corporation

--

--

ScopeoftheProject

PrivateOperator

CapitalExpenses

ManagementFees

Guarantees

PaymentofUser

Charges

Performance

Incentives

HumanResources

Table-4:Some

PPPProjectsandPub

licPublicResourcesinvolved

Projects

Resources


49/146


the 16 per cent rate of return on equity is post-tax return. To ensure

this, the CERC grosses up the rate of return on equity by the tax rate

that is applicable to the company. Thus, for a company paying normal

corporate tax at 33.99 per cent, the rate of return on equity that is

allowed to be charged to the consumers is almost 23.5 per cent.

The issue gets complicated when one considers that hydropower

companies are eligible for income tax holiday. The CERC states that it

wants the benefit of the income tax holiday to be available to the

project developer and not passed on to the consumers. While the

exact interpretation may require clarification, it appears that this

provision will lead to the piquant situation where the tax amount is

collected by the project from the consumers of electricity by loading

the same on to the tariff, but not passed on to the Government butrather retained by them.60

PPPs are In-Budget and On-Time

The evidence from studies conducted on the performances of PPPs

finds these projects as wanting in achieving their stated objectives. PPP

projects have not been able to stand the test of time and money on the

on-time and in-budget claims.

The main reasons behind PPP projects falling behind on their in-budget

and on-time commitments are the long tendering and negotiation periods

even before the project is actually awarded. These should be considered

as the time and resulting costs spent during the tendering and negotiation

periods, which would eventually be included into the total project cost.

For instance, the CAG audit report on PPP projects executed under

the National Highways Authority of India (NHAI) found out how PPP

projects deliver:

Though the target date for completion of NHDP Phase-I projects

was June 2004, the Authority was able to complete only five of the 17

PPP projects. There were inordinate delays in remaining projects

ranging between two and 42 months.61

Another case is the high-profile Mumbai Metro project which began

after an inexplicable delay of 19 months and without any indication of a

time-frame for its completion. The delay has escalated the cost of the

project from Rs 1500 crore to Rs 2356 crore. There are bottlenecks that

need to be resolved like land for various operations related to metro and


50/146


cost of shifting utility unmarked lines.62

In the water sector, the Maheshwar Hydro Power Project on the river

Narmada in Madhya Pradesh raises strong doubts of cost padding in the

project. For details see Box-8.

The Australian Council for Infrastructure Development has expressed

the view that unless tendering processes are well run it is possible that

the benefits of using a PPP for delivering the project may be outweighed

by the tendering costs. On the other hand Under conventional

procurement,63 the sunk costs of private contractors are much smaller

and contracts (e.g. for operations) often do not exceed 5 years.64

To add to this,

ppps in water sector final book

Documents